Local/State: Seattle City Light Deploys Energy Efficiency as a Service to Break Split Incentive

Photo by Seattle City Light

By Doug Smith

The City of Seattle has always been a trailblazer in the area of environmental consciousness and sustainability. It’s no surprise that they are leading the way in municipal energy efficiency programs that maximize energy efficiency.

The city’s government-owned utility, Seattle City Light (City Light), has been lighting things up since 1910. They integrated the first incandescent lighting system west of the Rockies, demonstrating a culture of innovation to provide quality service while developing progressive energy usage policies. For decades, City Light has provided numerous resources to residents and businesses to save energy and money. From rebates for energy-efficient upgrades to retrofit incentives to financing for green initiatives, City Light has set the curve when it comes to forward-thinking energy policies.

Despite this historic success, many traditional utility incentive programs in Seattle and nationwide have experienced a challenge known as “split incentive” between owner and tenant. This can occur in arrangements that include financing and leasing agreements for green initiatives. Investments that yield energy savings result in one party paying for improvements while the other party receives the benefits of reduced utility costs. Typically, the building owners pay for the capital upgrades while the savings are passed through to the tenants in decreased utility costs. This arrangement often fails to motivate building owners to front the cost for energy efficiency improvements. One alternative is having tenants pay for the energy efficiency investment, but because they do not own the building and usually have a short-term lease, tenants have little incentive to commit to a long-term investment. This outcome can lead to a lack of motivation to engage in capital improvements, energy-saving retrofits, and deep energy efficiencies in commercial buildings. 

Building owners often feel that this type of traditional program is cost-prohibitive. A recent study published in Energy Policy Journal shows that split incentives cause building owners to underinvest in energy efficiency measures. (Melvin, 2018) Consequently, because tenant-paying property owners do not invest at the same rate as building owners who pay the energy bill, industry leaders calculated tenant-paid energy bills were higher by single-digit percentages and heating costs increased by double digits. While there are many variables to consider with this type of analysis, looking at energy trends and commercial building usage, it’s not difficult to see the difference in cost due to incentivizing (or not incentivizing) property owners to make upgrades.

This inequity in the commercial market has remained a barrier, restricting progress on the city’s climate goals and initiatives. 

The Introduction of the MEETS™ Model

In 2014, Rob Harmon, a serial environmental entrepreneur and policy expert, founded the Metered Energy Efficiency Transaction Structure (MEETS) Coalition. This innovative program involved a collaboration with leading energy partners, including EnergyRM, the Bullitt Foundation, Equilibrium Capital, the New Building Institute, Oregon BEST, the Northwest Energy Efficiency Alliance, the National Renewable Energy Laboratory, Perkins Coie LLP, Cooley LLP, Ernst & Young, and Seattle City Light. The MEETS Coalition’s goal was to develop and deploy a program to combat the roadblocks caused by split incentives.

The Coalition’s solution was to transform the way energy is provided to the ratepayer. Traditionally the selling of energy is black and white, the utility sells power, kilowatt-hours (kWhs). MEETS re-framed this, in addition to selling kWhs the utility provides a service to the ratepayer to pay for deep energy efficiency improvements – a value-add. 

In essence, MEETS™ aligned the three of the major players; the utility, the building owner or operator, and the investor (developer). A long-term contract called a metered energy efficiency purchase agreement or MEEPA – modeled after a power purchase agreement – was executed between the utility and investor, who is responsible for paying for the energy efficiency upgrades. The MEEPA relies on an energy metering system. In the case of the MEETS™ model, energy metering was provided by EnergyRM, which utilizes a “dynamic baseline” to show energy usage improvements. 

“EnergyRM measures actual energy use in a building – normalized for factors including weather and occupancy – before and after efficiency improvements are made. The metered savings are the difference between this ‘dynamic baseline’ of energy usage and the actual energy usage after the improvements.” (Romano, 2013)

(MEETS™ Accelerator Coalition 2020)

Under the MEETS™ model, the utility pays the investor the ‘metered energy efficiency’ which is the amount of savings the utility avoided producing from the energy improvements. It’s important to note that the entity selling the efficiency is the investor, not the building owner. In turn, the investor makes rental payments to the building owner for use of the building to generate efficiencies. The building owner is required to pay the electrical bill, which stays the same as if no energy efficiencies were implemented. Thus, the utility recoups the pay-outs that are made to the investor. 

A report published by the American Council for an Energy-Efficient Economy (ACEEE) (2016) describes the MEETS™ model as: “…a pay-for-performance program in which the utility pays only for actual realized savings from a modified, super-efficient building. Moreover, the building’s tenants, who have not invested in the enhanced efficiency, pay the same utility bill they would have paid had no efficiency investments been made.” (Egnor et al., 2016)

Read the full description of The Metered Energy Efficiency Transaction Structure

Following the development of the new transaction structure, in collaboration with the MEETS Coalition, Seattle City Light and the Bullitt Foundation entered into a groundbreaking contract. In the spring of 2015, a trial project was launched with the Bullitt Center, a new commercial, Class A, six-story, 52,000-square-foot, net-positive-energy office building in Seattle. The pilot project was set to test the viability of the new model.

“This latest experiment—which could address flaws in the model for financing deep energy efficiency improvements—has the potential to be enormously important,” says Denis Hayes, Bullitt Foundation president and CEO. “And it will be one of the most difficult of these elements to push over the many hurdles.’” (Romano, 2013)

After the project ran and a committee of industry experts analyzed the results, they found that MEETS™ protects city utility revenues and eliminates utility risk. Concluding that it could be a viable option for overcoming split incentive. (Egnor et al., 2016)

Click here to learn more about the MEETs program with the Bullitt Center

Seattle City Light Evolves Model to Launch Energy Efficiency as a Service

After the cutting-edge trial yielded positive results, City Light saw an opportunity to offer this model on an expanded scale to its commercial building owners. Building upon the MEETS™ model and incorporating lessons learned for the Bullitt Center trial project, the City Light team crafted a new pilot program; Energy Efficiency as a Service (EEaS). In order to deploy this program at a large-scale, some changes were made from the original MEETS™ model. 

  • Measurement & Verification: EEaS will be transitioning away from the dynamic baseline energy usage system. City Light will be utilizing an M&V consultant to create and maintain the baseline model for all participating buildings and quantify the avoided energy use. The M&V consultant’s methodology for developing the adjusted baseline energy usage and calculating avoided energy usage will be based on industry standards, including the Whole Building Performance Path in ASHRAE Guideline 14 (American Society of Heating, Refrigerating and Air-Conditioning Engineers), IPMVP’s Application Guide on Non-routine Events and Adjustments, and Seattle Energy Code C401.
  • Contract Structure: Two contracts will be required for the EEaS pilot program compared to one contract – between the utility and investor (developer). City Light will enter into a contract with the building owner (Participation Agreement) and with the developer (Power Purchase Agreement).

Under the EEaS pilot program, Seattle City Light will bill customers in the program (building owners) for actual electricity used, plus an “energy efficiency service fee” (EE Service Fee). The EE Service Fee is based on a calculated Avoided Energy Use. The Avoided Energy Use is the building baseline electricity consumption use minus the actual current electricity consumption for a particular billing period. Seattle City Light will use the funds from the EE Service Fee to pay the developer. (Seattle City Light, 2020).

Transparency is a key goal for Seattle City Light. All customers, building owners, and those occupying the building who are responsible for paying the utility bill are provided clarity on what the EE Service Fee is and how it is calculated. There is an understanding that the fee is in addition to and separate from the standard rate payment for electricity used during the billing period. They see the benefit in paying the additional service fee each month because it allows them to invest in a more comfortable and healthier environment at no additional cost, performance, or financial risk to them. All sides operate fairly and transparently as energy use is audited by an independent, unbiased, and transparent third-party every month.  

Applications for the first phase of the EEaS pilot program became available in January 2020 and closed 16 weeks later in April. A second phase is planned to start in 2021. City Light has been authorized to accept up to 30 buildings to participate in the pilot program.

“Seattle has a climate action plan,” said Colm Otten, program manager for solution design and management at Seattle City Light. “That is to reduce carbon emissions by 80 percent by 2030 and be carbon neutral by 2050. Programs like EEaS fit into the bigger carbon neutral goal by freeing up power to displace carbon-heavy energy use elsewhere on the Western seaboard. About 30 percent of carbon emissions in Seattle come from building utility carbon,” stated Otten.

The EEaS pilot program enables building owners to implement deep energy efficiency improvements. City Light provides long-term payments based on actual energy saved. The financial structure is designed to overcome building owners’ reluctance to undertake costly energy efficiency improvements by ensuring a predictable rate of return on their investments.

“The City wins in energy use reduction, and building owners win in payments for their energy savings,” said Mayor Durkan’s official statement on the program. “This legislation’s expansion of the pilot program authorizes up to 30 buildings to participate in the EEaS program, with contract lengths of up to 20 years.” (City of Seattle, 2018) 

“We’ve got five applications in the door so far,” said Otten. “We have a solicitation period from January 2021 till March 31, 2021, where we are looking to enroll an additional ten projects into the program.”  

“The applications we received so far are very large commercial buildings, many of them very old,” said Otten. “There are buildings from the 1910s to the 1970s in the mix.” He described that the participants are partaking in major capital improvements such as substantial upgrades to HVAC systems, control systems, and lighting.

City Light is in the process of solidifying agreements with the current pool of applicants. After City Light has executed agreements and scopes of work for the first 15, they plan to pause new projects temporarily while analyzing current initiatives, identifying best practices and barriers. Once the first group is nearing completion, they plan to engage with an additional 15 applicants. 

“We’re going to gauge success by, first, understanding if there is an appetite for this type of program,” said Otten. “Second, we want to know if it really generates the efficiency that we are not currently getting because of the split incentive. The early results are looking very promising.”

As these innovative programs continue to demonstrate success, look for them to be adopted by cities and energy providers throughout the United States. 

Colm Otten, Photo by Seattle City Light

Colm Otten is a Sr. Program Manager at Seattle City Light. He is responsible for designing, planning and managing programs and services in the Customer Care & Energy Solutions program portfolio. His focus in on performance based programs in the commercial sector. He manages the Pay for Performance program and the Energy Efficiency as a Service pilot program.

To learn more:
Seattle City Light Energy Efficiency as a Service